Even "Broke" College Students Should Be Saving for Retirement
College students tend to be focused on the present—studying for the latest exam, finding the best party to attend, and scoring tickets for next weekend’s game.
But too much focusing on the present can have a negative impact on your future. Thankfully, you have a great deal of control over your destiny. Now—before you’ve entered the workforce—is the time to begin planning for retirement, to ensure comfortable times ahead.
Regardless of income level or major, most college students have the ability to save for retirement—the question is whether you have the desire to start saving so early. The future benefits are undeniable, but it can be difficult to recognize that when you haven’t even graduated yet.
Here’s why you should consider starting to save for retirement right now—and how to make it happen with minimal effort.
Time Is on Your Side
Many college students don’t save for retirement because they don’t think they have enough money to make a difference. That’s the irony: Saving early is the most important aspect of building a nest egg, not how much you’re saving.
Saving for retirement is about maximizing compound interest. Compound interest is interest that builds onto itself. Over decades, your original contributions will grow exponentially because of compound interest.
For example, if John contributes $25 each month to a retirement account that earns 7% interest, he’ll have $59,890.53 after 40 years. That’s a profit of almost $48,000 from pure interest.
If he waits 10 years to start contributing, he’ll have to save $52.50 each month to reach the same result after 30 years—more than double his original amount.
You'll Always Have Competing Priorities
There’s always a reason not to save—you want to go to Cancun for spring break, you have textbooks to buy or homecoming tickets to pay for. But here’s a secret: The excuses don’t go away as you age. They simply shift into other priorities like buying a new car, paying for a wedding, or purchasing a home.
The sooner you can start saving for retirement, the more routine it’ll be and the fewer excuses you’ll have. Building a nest egg will become a habit that’s as familiar to you as singing your school’s fight song when you hear the opening melody.
Keep in mind that today’s college students may have fewer Social Security benefits than their parents and grandparents, which makes saving for retirement even more vital for the millennial generation. More than half of today’s baby boomers do not have enough to retire on, according to a 2015 survey from Transamerica Center for Retirement Studies. Avoid following in their footsteps by starting to save today.
Four Tips to Start Saving Early
(1) Take advantage of robo advisors or lifecycle funds. Robo advisors such as Betterment take the guesswork out of investing, if you don’t want to scour through a list of possible options. They ask you questions and determine the best funds to meet your goals. Similarly, brokerages like Fidelity offer low-cost lifecycle funds that automatically balance your investments based on your age.
(2) Open an employer-sponsored plan. Some employers offer 401(k)s and other retirement plans even for part-time workers. Ask your boss or HR representative if you’re eligible. Many also offer 401(k) matching programs where they’ll give you free money if you contribute a certain amount toward your account.
(3) Use technology. Apps like Acorns simplify the investing process, using your “spare change” to invest in exchange-traded funds. These Exchange-Traded Funds (ETFs) are ideal for young investors who want to see growth in their portfolio without choosing individual stocks.
(4) Start an IRA. You can create an Individual Retirement Account whether or not you’re eligible for a 401(k) at your workplace. You can only contribute money that’s been earned through work, not money you’ve been given. It may be useful to talk to a financial adviser before creating an IRA to ensure that you choose the funds appropriate for your age and retirement goals.
The sooner you start saving, the more your savings will compound before you need them later in life. Saving for retirement while in college lays the groundwork for a healthy and prosperous financial lifestyle.
Zina Kumok is a writer for TraditionalIRA.com and RothIRA.com specializing in personal finance. She started covering personal finance while blogging about paying off $28,000 worth of student loans in three years. She has been featured in Lifehacker, Daily Worth, and Forbes.